Johnson Controls Eyes The Growing Start-Stop Battery Market In China With SAIC Deal

Johnson Controls (NYSE:JCI) recently announced that it has signed a long term agreement with SAIC Motors in China for supply of its Absorbent Glass Mat (AGM) batteries for start-stop vehicles produced by the latter. ^[1] We figure this agreement will likely accelerate Johnson Controls’s growth over the long term as China’s automobile market not only offers significant growth potential, but also start-stop batteries are likely to constitute a growing share of the automobile battery market in the country.

Johnson Controls is already a leading producer of conventional lead-acid automobile batteries with over a third of the global market share in this segment. ^[2] However, with rising fuel prices as well as stricter vehicle emission norms, advanced batteries that help lower fuel consumption and emissions are occupying an increasing share of the global auto battery market. It is here that Johnson Controls’s AGM batteries by powering start-stop technology in vehicles is capturing the growth being driven by these two trends. Start-stop technology turns-off the engine when the vehicle comes to a halt and restarts it as soon as the driver releases the brake pedal or presses the clutch. The frequent engine starts required by this technology are powered by AGM batteries. Estimates from Johnson Controls suggest that its AGM batteries improve vehicle fuel efficiency by 5-8% saving consumers money. ^[3] Additionally, these batteries lower vehicle emissions helping auto manufacturers meet stricter emission norms.

We figure this AGM battery supply deal with SAIC Motors, which is one of the largest car manufacturers in China, will enable Johnson Controls to increase its market share in the fast-growing China start-stop battery market. As a result, growth in the company’s auto battery segment, which constitutes nearly a third of its total segment profits, will rise in the coming years. Johnson Controls currently anticipates sales in its auto battery segment to grow by 8-9% per year through the next five years. ^[4] However, in the recently concluded March quarter, sales at this segment were flat on a year-over-year basis. ^[5] Though sales growth from the segment is likely to pick up in the remaining quarters of this year, we figure in the long term, propelled by growth from the China start-stop battery market, the company will be able to meet its targeted segment sales growth.

We currently have a stock price estimate of $50.50 for Johnson Controls, around 10% ahead of its current market price.

See our complete analysis of Johnson Controls here

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Adoption Of Start-Stop Technology Is Increasing In Many Major Markets

Since their launch in 2001, Johnson Controls has produced over 21 million AGM batteries for start-stop vehicles. ^[3] Most of this production has taken place at the company’s plant in Germany since Europe was the first region to apply start-stop technology in vehicles. The company says that currently more than half of new vehicles built in Europe feature this technology. Other regions, especially North America and China, are also catching up to adopt start-stop technology in vehicles. Accordingly in the U.S., Johnson Controls has started producing AGM batteries from two plants situated in Missouri and Ohio. Currently, the company’s AGM batteries power Ford’s 2013 Auto start-stop and Chevy’s Malibu start-stop vehicles in the country. The deal with SAIC Motors will help Johnson Controls take advantage of the growing adoption of this technology in China, which produced over 18 million cars last year. ^[6] And, if adoption of start-stop vehicle technology in China rises to levels seen in Europe, then the potential market opportunity for Johnson Controls is huge. We figure the importance of this deal with SAIC primarily comes from this potential market opportunity.

Globally, by the year 2018, Johnson Controls anticipates that start-stop technology could feature in 42 million vehicles or roughly 40% of total new car builds. ^[3] In our opinion, as start-stop technology is easier to implement and comes with a lower price premium than hybrid and electric technologies, its adoption in cars could grow to levels anticipated by the company.

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1. Johnson Controls continues to grow spectrum of energy storage technology in China, May 8 2014, www.johnsoncontrols.com [↩]
2. Johnson Controls power solutions segment overview, May 14 2014, www.johnsoncontrols.com [↩]
3. Johnson Controls’s start-stop technology fact sheet, May 14 2014, www.johnsoncontrols.com [↩] [↩] [↩]
4. Johnson Controls’s 2014 outlook, May 14 2014, www.johnsoncontrols.com [↩]
5. Johnson Controls fiscal 2014 Q2 earnings presentation, April 23 2014, www.johnsoncontrols.com [↩]
6. Global 2013 auto production stats, May 14 2014, www.oica.net [↩]